Potash issues profit warning on contract delays with China, India

Potash Corp. cuts 2012 guidance on contract delays with China, India

After Potash Corp. of Saskatchewan Inc. slashed its earnings guidance on Wednesday, many investors had one question: What took so long?

It was clear that contract negotiations between potash producers and their buyers in China and India were dragging on longer than expected, meaning sales volumes targeted for this year would be pushed into 2013. The profit warning was largely priced into the stock, which actually gained 2¢ on Wednesday to close at $41.12.

However, the warning highlighted ongoing concerns some analysts have about the potash market.

Quite simply, it is going through a bit of a slump. Demand has been relatively weak and inventories are higher than normal at Chinese ports. Spot prices have been under pressure — though they remain close to US$500 a tonne — and analysts have suggested demand is outpacing supply by a considerable margin.

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With all that in mind, buyers in China and India are perfectly happy to wait out the potash producers while pushing for lower prices in their next round of contracts.

In the previous contracts, which expired last month, China paid roughly US$470 a tonne for imported potash and India paid about US$490 a tonne. Joel Jackson, an analyst at BMO Capital Markets, expects prices in the upcoming contracts will be settled for about US$20 to US$30 a tonne lower.

“I think there’s just a general [demand] slowdown in the world, timed with a seasonal slowdown,” he said. He does not see any major catalysts for potash prices until early next year.

Other analysts have been much more bearish. Jacob Bout of CIBC World Markets cut his long-term potash price assumption this week to US$450 (from US$550), citing a “chronic oversupply situation” in the potash industry. And National Bank analyst Robert Winslow wrote the industry is experiencing “demand destruction” because prices are too high.

The potash industry is highly concentrated with a handful of producers in Canada, Russia and Belarus dominating the market, and buyers have long complained that they keep prices higher than they should be. The potash producers, however, point to high grain prices as evidence farmers can afford high fertilizer prices.

Shares of Potash Corp., the world’s biggest fertilizer company, have performed worse than its two local rivals, Agrium Inc. and Mosaic Co., in recent months because it has the most exposure to the struggling potash sector. The majority of its earnings are derived from potash. Agrium, which has performed the best of the three fertilizer firms, derives less than a third of its earnings from potash.

Potash Corp. has now cut its 2012 guidance on three separate occasions this year, though one of those was due to an impairment charge. The company warned on Wednesday that earnings will fall below the low end of its prior guidance of US$2.80 to US$3.20 a share. In January, Potash Corp. predicted earnings of US$3.40 to US$4 a share.

The Saskatoon-based company is also taking measures to address the current industry imbalance between supply and demand. Shortly after it issued the profit warning, the company said it would shut down its Rocanville and Lanigan mines in Saskatchewan for eight weeks each.

TD Securities analyst Paul D’Amico wrote the production cuts amount to roughly one million tonnes of potash, spread over late 2012 and early 2013. He noted Potash Corp. already cut about 2.1 million tonnes of production earlier this year.

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.

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